YOU’RE LOOKING FOR FINANCING FOR A BUSINESS PURCHASE!
BUYING A BUSINESS 101!
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Buying a business in Canada involves (some) risk, so is there a HOW TO BUY A BUSINESS when it comes to eliminating some of that risk? We think there is... so let's dig in.
WHAT AMOUNT OF MONEY DO YOU NEED TO BUY A BUSINESS
Have we got a story for you? Yesterday, scouts honour, we got a call from a client of ours 15 years ago. He wanted some advice on how to buy a business and what's involved... including the proverbial question “how much money do I have to come up with in addition to the financing for a business for sale?
While we are still getting over a client remembering our services for 15 years it got us to thinking about ways to provide him with solid clarity around the risk inherent in any business purchase. We think there are probably 4 key areas you have to focus on when buying a small business and looking for financing on your purchase.
In effect, we’re talking about the health of the patient when it comes to small business acquisitions. So when business owners understand how healthy or unhealthy that patient is you can address the issues of profitability and financing that are key to overall success in any venture. Interpreting that overall ' business health' is critical.
4 KEY TAKEAWAYS IN ASSESSING BUSINESS RISK WHEN BUYING A COMPANY
To assess risk on small businesses you really have to put yourself in the exact same position as those smart Bay Street guys. Your focus should be on the value of the business relative to the purchase price. They also look at 4 key areas:
Debt - Present and future
Liquidity and Cash Flow
Profit
Asset turnover
Keep in mind also the true value of maintaining the customer base for continuity, as well as the true value of business assets - these should be considered and reviewed with the current owner well before final legal documents and negotiations.
UNDERSTANDING THE FINANCIAL STATEMENTS AND ' NUMBER RELATIONSHIPS'
While the Bay street gang focuses on words such as ' financial ratios' we've always preferred to call them ' relationships'. And once you understand those relationships you're in a position to make an informed business decision. In many cases, you can draw on your own past business experience to wade through and understand some of these finance and number relationships.
It's also important to look at our 4 criteria over time, not just as the moment, as a business changes its balance sheet and income statement literally every minute as you sell and collect, utilize assets, etc. Bottom line, make sure you, or an expert, do your diligence on the numbers for the business you want to buy.
Every type of business has different valuation metrics.
HOW MUCH DEBT LOAN CAN A BUSINESS HANDLE
Debt load is key to any business purchase and financing. Existing debt must be repaid or refinanced, and typically any business you buy should have no more than 2 or 3 times debt versus your owner equity. That number varies by type of industry and the ability of any company to generate cash flow. Ultimately you wish to ensure that the cash you can generate can repay fixed or operating debt.
FOCUS ON CURRENT ASSET AND CASH FLOW GENERATING ABILITY
We haven’t met anyone yet that disagrees with ' CASH IS KING ' so focus a lot of time on short term current assets - and understand how inventories and accounts receivable turnover and how they can be monetized for more liquidity.
WHAT IS LONG TERM GROWTH POTENTIAL OF THE BUSINESS
Every entrepreneur intuitively focuses on sales growth - a company is cheap when it’s for sale if it’s in a death spiral. So understanding sales growth potential, client payment terms, gross margins and net income potential is key.
We're big on item # 4 in our patient health scenario - Asset turnover. Just your ability to turn existing assets more efficiently - i.e. collect A/R faster, generate more inventory turns, dispose of unused assets, etc can help fix your ship without any external help and financing that is unneeded.
HOW TO FINANCE A BUSINESS PURCHASE
Once you’ve assessed the health of any company you wish to purchase it can be financed in several manners. They might include:
Government Business Loans (THE SBL)
Commercial bank facilities - term and operating
Non-bank asset-based lines of credit
Bridge loans
Vendor take-back options
CONCLUSION
Looking for a ' how-to ' when it comes to buying a business and financing it in Canada. If you are thinking of buying an existing business in Canada Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your business purchase needs, and a lot of solid advice along the way!
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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